Coles ‘invests in lower prices’, lifts Wesfarmers’ earnings

Wesfarmers has reported a net profit after tax from continuing operations of $1,376 million for the half-year ended 31 December 2014, an increase of 8.3 per cent on the prior corresponding period, with earnings growth from supermarket business Coles and home improvement business Bunnings contributing to the lift in profit.

Some commentators have suggested that the emphasis on getting better deals from suppliers for supermarket business Coles may have backfired, as evidenced by recent action by the Australian Competition and Consumer Commission and the Federal Court for unconscionable conduct, which Australian Food News reported recently.

Reported NPAT, which includes the results from discontinued operations1 in the prior corresponding period, decreased 3.7 per cent, while return on equity (R12) increased 100 basis points to 10.4 per cent. Managing Director Richard Goyder said it was pleasing to have recorded a solid increase in underlying profit for the first half.

“Despite variability in the domestic economy and volatility in global markets, the Group delivered a pleasing increase in underlying earnings in the half which demonstrated the benefits of its conglomerate structure,” Mr Goyder said. “Continued strong performances in the Group’s retail portfolio supported good growth in retail earnings,” he said.

“The trading momentum of our retail businesses improved through the half, culminating in a strong performance in the important Christmas period,” Mr Goyder said. “Lower earnings were recorded from the Group’s industrial businesses, where lower commodity prices resulted in challenging trading conditions,” he said.

Coles invests earnings in low price campaigns and promotions

Supermarket group Coles saw earnings before interest and tax increase 7.1 per cent to $895 million for the period on overall sales growth of 2.8 per cent. Food and liquor sales grew 5.3 per cent.

“Coles’ performance was driven by another good result from supermarkets,” Mr Goyder said. “Sales momentum continued during the half as ongoing productivity improvements and efficiencies funded greater investment in lower prices,” he said.

Mr Goyder said further improvement in the quality and availability of fresh food also supported growth in customer transactions, basket size and sales density.

Coles said it was “actively working with its suppliers to strengthen long-term relationships to deliver quality and value in an increasingly competitive market”.

Mr Goyder said Early initiatives of the Coles Liquor turnaround program focused on “price investment, inventory management, range rationalisation and store network optimisation”.

“Convenience earnings were lower, driven largely by reduced fuel volumes which were partially offset by improved store sales as the business continued to improve its customer offer,” Mr Goyder said.

Bunnings and Officeworks report growth

Wesfarmers reported that its home improvement business Bunnings saw earnings increase 10 per cent to $618 million on sales growth of 11.9 per cent.

Department store Kmart’s earnings grew 11.2 per cent to $289 million for the period on sales growth of 5.3 per cent.

“Kmart’s strong result, which included accelerated sales growth in the second quarter, reflected its continued focus on investing business efficiencies in lower prices and improving its product range,” Mr Goyder said. “The sales growth also reflected a higher contribution from new store openings and store refurbishment activity.”

However, Wesfarmer’s other department store business Target’s saw a drop in sales of 1.8 per cent, although earnings of $70 million were in line with the prior year.

“Target’s earnings performance was impacted by a challenging September quarter, where there was a need for high levels of winter clearance activity,” Mr Goyder said. “Sales performance improved during the second quarter and earnings increased as the implementation of Target’s transformation plan gathered pace,” he said.

Industrial

Mr Goyder said Wesfarmers’ industrial divisions continued to operate in “difficult external environments”, with commodity price declines reducing business activity in many industrial sectors.

Earnings for the Chemicals, Energy and Fertilisers division of $95 million were down 13.6 per cent.

“An improved contribution from the fertilisers business was more than offset by a significant decline in Kleenheat Gas’ performance as a result of lower international benchmark LPG pricing and lower LPG content in the Dampier to Bunbury natural gas pipeline,” Mr Goyder said.

“Earnings from the chemicals business were slightly below the prior year, affected by gas input cost increases and the loss of carbon abatement income, which offset increased ammonium nitrate earnings following the recent plant capacity expansion at Kwinana,” Mr Goyder said.

“Export coal prices were lower than the prior corresponding period and more than offset higher sales volumes and further effective control of mining costs,” Mr Goyder said.

The Industrial and Safety division recorded earnings of $50 million, $23 million below the prior period.

“Focus by key customers on ongoing cost reduction and reducing business activity led to a very difficult sales market and pressure on margins,” Mr Goyder said.

Other businesses and cash flows

Other businesses and corporate overheads reported an expense from continuing operations of $26 million for the period, compared to an expense of $52 million in the previous corresponding period.

Free cash flows were $1,269 million, $253 million above the prior corresponding period, with higher operating cash flows more than offsetting higher net capital expenditure. Operating cash flows of $2,281 million were $524 million or 29.8 per cent above the prior corresponding period, largely as a result of increased working capital cash flows.

Period-end timing differences with regards to creditors, and a strong focus on stock management, contributed to the increased working capital cash flows. Gross capital expenditure of $1,207 million was $47 million or 4.1 per cent above the prior corresponding period. Net capital expenditure was 61.4 per cent or $342 million above the prior corresponding period as a result of lower proceeds from the sale of property, plant and equipment due to the non-repeat of strong retail property disposal activity in the prior period.

Outlook

As the domestic economy transitions from a period of reliance on high levels of resource investment, Wesfarmers said it was generally optimistic in its outlook. Wesfarmers’ said its portfolio of retail businesses was “positioned well” in an environment where, notwithstanding low interest rates and recent declines in fuel prices, consumers continue to manage household budgets carefully. Wesfarmers said its retail businesses would continue to improve customer offers through innovation in merchandising and better service for customers. Focus will also remain on driving productivity gains, supply chain efficiencies and cost savings, and reinvestment into more value for customers.

Wesfarmers said it expected customer reach to further improve through continued growth and optimisation of store networks and advancement of online offers.

The Company said its industrial businesses would continue their strong focus on operational productivity to maintain and, where possible, lower cost positions. At current commodity prices the external trading environment is expected to remain challenging. The Group’s low cost operations provide earnings leverage should market conditions improve.

Wesfarmers said it would continue to actively develop and manage its portfolio of businesses, maintaining a strong balance sheet in order to take advantage of opportunities, should they arise, to support the delivery of satisfactory long-term shareholder returns.